One of the dominant failure modes for bearing steels under rolling contact fatigue (RCF) loading is the formation of white etching area (WEA) in the subsurface. The presence of WEA has a great influence on the contact fatigue life. WEA leads to decrease in load carrying capacity of bearing materials due to microstructural degradation and accompanied cracks. As stress rises, the subsurface non-metallic inclusions are preferential places for WEA initiation, forming butterfly-shaped WEA. Extensive studies have been conducted regarding WEA’s microstructure, composition, influential factors and formation mechanism. However, there is a large discrepancy in the formation mechanism, and some are even contradictory. In order to reveal the essence of the WEA and the underlying mechanism, the WEA was investigated from a new perspective of shear localization due to plastic strain accumulation. Firstly, rolling contact fatigue tests were carried out to generate WEAs of various morphologies. Secondly, a damage evolution constitutive model was established through coupling the crystal plasticity and phase field damage theory to study plastic strain accumulation and damage evolution at a non-metallic inclusion. The equation was programmed and incorporated into the finite element software of ABAQUS. The constitutive relationship for crystal plasticity damage consists of user subroutines UMAT and HETVAL. Finally, various morphologies of WEAs were compared with the simulation results. The results showed that the localization of the plastic strain leaded to shear band formation. The morphology, orientation and strain of the shear band showed good consistency with those of the WEA, indicating that the WEA was actually the shear band as a result of strain localization. The crystal orientation had a great influence on the WEA damage development. The WEA formed only at preferential crystal orientations. This well explained why various morphologies of WEAs were present in the same section of the sample. The WEA was also influenced by the elastic modulus of the non-metallic inclusion. In contrast to the WEA at the soft inclusion (WEA was along 50°~60° ), the shear band and WEA developped tangent to the inclusion at the hard inclusion, forming four bands. Whatever at the soft or hard inclusion, the center of the band had the largest damage and plastic strain. Therefore, it was suggested that the effect of the elastic modulus of the inclusion was mainly on the WEA’s morphology and distribution. The interior of the shear band was in a state of high strain and low stress. The shear strain and damage reached the maximum in the center of the shear band, and decreased sharply along sides of the band. Whereas, the stress in the band center was the smallest, approaching to zero, and increased along the band width. The result indicated that crack initiated and propagated in the WEA. This clarified the relationship between the crack and the WEA formation. That was, cracks were generated due to inhomogeneous strain during the formation of WEA, rather than as reported that, the cracks were generated first, and then the friction between the upper and lower crack faces leaded to the formation of the WEA.