Manufacturing of the internal combustion engines (ICEs) has very critical requirements on the precision and tolerance of engine parts in order to guarantee the engine performance. As a typical complex nonlinear system, small changes in dimensions of ICE components may have great impact on the performance and cost of the manufacturing of ICES. In this regard, it is still necessary to discuss the optimization of the tolerance and manufacturing precision of the critical components of ICEs even though the tolerance optimization in general has been reported in the literature. A systematic process for determining optimal tolerances will overcome the disadvantages of the traditional experience-based tolerance design and therefore improve the system performance. A novel multi-objective tolerance design optimization problem considering the friction loss in two important systems, the piston and the crankshaft, is proposed and solved in this work, since nearly 70% mechanical loss of an engine is caused by the piston and the crankshaft systems and friction loss is an important factor to affect the performance of the ICEs. The simulation models of the piston and crankshaft system are built using AVL Excite Piston & Ring® and Power Unit®, respectively. An analysis model used in the optimization is set up using the Gaussian Process with the corresponding simulation data. Finally, the multi-objective tolerance design optimization problem is formulated and solved using a newly developed sequential multi-objective optimization (S-MOO) method.