How to properly generate nested pgfkeys procedurally?

Your issue is hash doubling.

You're using the following code:

\newcommand{\generateEntry}[2]{
    % DESCRIPTION: Creating the pgfkeys "family" and intialize with default values
    \pgfkeys{
        /handlers/.is setter/.code=\pgfkeysedef{\pgfkeyscurrentpath}{%
            \noexpand\pgfqkeysalso{\pgfkeyscurrentpath}{##1}%
        },%
     % ...
     }
     % ...
}

So you're using a \newcommand (first level definition), and inside that a .code handler (second level definition) and inside that a \pgfkeysedef (third level definition). But inside the replacement text specified for \pgfkeysedef you're using ##1, which is the second level parameter, so the argument of the .is setter handler, which is empty in all your usages (since you use product/.is setter,). You need to turn that one to the parameter meant to be picked up by \pgfkeysedef, hence you need to re-double the hashes:

\newcommand{\generateEntry}[2]{
    % DESCRIPTION: Creating the pgfkeys "family" and intialize with default values
    \pgfkeys{
        /handlers/.is setter/.code=\pgfkeysedef{\pgfkeyscurrentpath}{%
            \noexpand\pgfqkeysalso{\pgfkeyscurrentpath}{####1}%
        },%
     % ...
     }
     % ...
}

This one will work.

The one with the manual setup worked because it wasn't inside \newcommand, hence you didn't need to double hashes twice and your code was correct.

Full corrected MWE (I also removed a few of your spurious spaces):

\documentclass[parskip=full]{scrreprt}

\usepackage{pgffor}
\usepackage{pgfkeys}

% DESCRIPTION: Set up inventory entries manually
\pgfkeys{
    /handlers/.is setter/.code=\pgfkeysedef{\pgfkeyscurrentpath}{%
        \noexpand\pgfqkeys{\pgfkeyscurrentpath}{##1}%
    },%
    /inventory/.cd,
        Manual 5 Speed/.is setter,
            Manual 5 Speed/inventory id/.initial = XXXXXXXXXX,
            Manual 5 Speed/product/.is setter,%
                Manual 5 Speed/product/manufacturer/.initial = EMPTY,
                Manual 5 Speed/product/product id/.initial = EMPTY,
        Manual 6 Speed/.is setter,
            Manual 6 Speed/inventory id/.initial = YYYYYYYYYY,
            Manual 6 Speed/product/.is setter,%
                Manual 6 Speed/product/manufacturer/.initial = EMPTY,
                Manual 6 Speed/product/product id/.initial = EMPTY
}

% DESCRIPTION: Logic for creating pgfkey "database" entry automatically and setting them to user specified data
% ARGUMENTS: #1 = entry product, #2 = entry data
\newcommand{\generateEntry}[2]{%
    % DESCRIPTION: Creating the pgfkeys "family" and intialize with default values
    \pgfkeys{%
        /handlers/.is setter/.code=\pgfkeysedef{\pgfkeyscurrentpath}{%
            \noexpand\pgfqkeysalso{\pgfkeyscurrentpath}{####1}%
        },%
        /inventory/#1/.cd,
        inventory id/.initial = ZZZZZZZZZZ,
        product/.is setter,
        product/manufacturer/.initial = EMPTY,
        product/product id/.initial = EMPTY
    }%
    %
    % DESCRIPTION: Setting the data to the one specified by the user
    \pgfqkeys{/inventory/#1}{#2}%
}

% DESCRIPTION: Macro for testing whether it is a problem with wrapping \pgfqkeys in an additional macro
\newcommand{\setEntryData}[2]{%
    \pgfqkeys{/inventory/#1}{#2}%
}

\begin{document}
    % DESCRIPTION: Setting the data of the manually added entry
    % with \pgfqkeys and "{}" notation
    % STATUS: WORKS AS EXPECTED
    \pgfqkeys{/inventory/Manual 5 Speed}{
        inventory id = 6,
        product = {
            manufacturer = Herbert Motors,
            product id = 433M5
        }
    }

    % DESCRIPTION: Setting the data of the manually added entry
    % with \pgfqkeys wrapped in macro and "{}" notation
    % STATUS: WORKS  AS EXPECTED
    \setEntryData{Manual 6 Speed}{
        inventory id = 11,
        product = {
            manufacturer = Herbert Motors,
            product id = 433M6
        }
    }

    % DESCRIPTION: Generate and set data for automatic entry
    % with "/" notation
    % STATUS: WORKS  AS EXPECTED
    \generateEntry{Automatic 4 Speed}{
        inventory id = 21,
        product/manufacturer = Jane's Speedshop,
        product/product id = JS4A
    }

    % DESCRIPTION: Generate and set data for automatic entry
    % with "{}" notation
    % STATUS: FAILS FOR NESTED KEYS
    \generateEntry{Automatic 5 Speed}{
        inventory id = 42,
        product = {
            manufacturer = Jane's Speedshop,
            product id = JS5A
        }
    }

    % DESCRIPTION: Visualize the data stored in the pgfkeys
    \section*{Inventory}
        \foreach \entry in {Manual 5 Speed, Manual 6 Speed, Automatic 4 Speed, Automatic 5 Speed}{
            \textbf{\entry}:\\
            inventory id: \pgfkeysvalueof{/inventory/\entry/inventory id}\\
            manufacturer: \pgfkeysvalueof{/inventory/\entry/product/manufacturer}\\
            product id:  \pgfkeysvalueof{/inventory/\entry/product/product id} \\[0.25cm]
        }
\end{document}