Specially designed samples of laser clad AlSi40 functionally graded materials (FGM) are made for evaluating the interfacial adhesion. To obtain the interfacial bond strength notches are made right at the interface of the FGMs. In-situ microstructural observations during straining in a field-emission gun environmental scanning electron microscopy reveal different failure modes of the FGMs and substrate. Mapping of strain fields using digital imaging correlation shows a gradual transition of deformation over the interface region and softening effects in the heat-affected zones of the FGM tracks. The strengthening of the FGM is dominated by the size of the Al halos around the particles, in accordance with a dislocation pile-up model.