The latter. Motor losses are in large part due to resistance in the windings. Going from 95% efficiency to 99% efficiency means 1/5 as much heat output per unit

The latter. Motor losses are in large part due to resistance in the windings. Going from 95% efficiency to 99% efficiency means 1/5 as much heat output per unit of energy delivered, which means if your motor is thermally limited (which many are these days!) you can push five times as much power through it without it burning itself up. Similarly, increased achievable magnetic flux means a smaller motor can achieve greater torque and power so it can convert more electricity into movement.