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Shape memory alloys are continuously spreading into new applications due to their multi-functional properties. During production, carbon precipitates form, which trigger premature fatigue structural failure. This study employs two continuum models for shape memory alloys to simulate the phase transformation and the stress distribution around a hard defect in a shape memory matrix. At the interface of the components, high stresses localize which lead to localized phase transformations. These phase transformations propagate in a criss-cross pattern during the loading half-cycle. During the unloading half-cycle the transformed areas recede and the most remnant transformation area remains at the interface. Concluding, defects in shape memory alloys significantly localize phase transformations.