I would definitely speak to Yangdu about this, hopefully something can be worked out, but if not I understand the limitations of the warranty and why.
If the steel is as grainy as it looks it IS a manufacturing issue. Over heating of the steel both during the forging and hardening stages causes grain growth and significantly weakens the steel (NOT tempering or any subsequent polishing, sharpening, etc~the temp isn't high enough). Other possibilities are inclusions in the steel or a crack that was in the used spring stock (faulty materials issue), or an internal crack that formed in the blade when it was quenched.
Grinding out that large of a chip also probably would not yield good results as it goes almost to the fuller. Removing it will almost surely remove most if not all of the hardened section of this blade (a good etching would reveal this).
Best,
Steve