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The fidelity of the hybrid electric vehicle simulation is increased with the integration of a computationally-efficient finite-element based electric machine model, in order to address optimization of component design for system level goals. In-wheel electric motors are considered because of the off-road military application which differs significantly from commercial HEV applications. Optimization framework is setup by coupling the vehicle simulation to the constrained optimization solver. Utilizing the increased design flexibility afforded by the model, the solver is able to reshape the electric machine's efficiency map to better match the vehicle operation points. As the result, the favorable design of the e-machine is selected to improve vehicle fuel economy and reduce cost, while satisfying performance constraints.