Basically, you lose a lot of filesize in several areas:
Compression - this is NOT a VCD; VCDs use (I think) mpeg2 (a la DVDs) - which means less data discarded, but subsequently a much bigger file. A DivX or XviD file uses mpeg4; loads for stuff kicked under the carpet. Result: Looks much better, since what IS discarded is completely (well... seems to be completely) unnecessary.
Resolution Change - If an SVCD is 640x480, then if you think about screen area, you're encoding 1/4 of that if you resize it down to 320x240; less if you use 320x176 (which I ALWAYS do to save space). Bear in mind you can go a lot below 320x176 (I've got a Harry Potter encode I did a while back that's on 320x120 or something; I couldn't be bothered to crop it, since I wasn't experienced at the time) but it gets less of an experience to watch as you lose quality.
Framerate change - If a movie has 24fps, its going to be bigger than one with 10. Although you'd be surprised just how close they come out in reality (I had a sitaiton where I had a 20fps movie come out only 7megs larger than a 10fps movie; I assume because it didn't involve too much action, so not too much additional encoding needed if you think about it, but still worth bearing in mind).
And possibly a few more. But that's how you get what appears to be such nice quality in such small space. Bear in mind, if you play most of the movies encoded for GP32 on a PC, they'll look fairly pants though - low resolution, and more juttery than on an LCD. That said, I've an encode of some things (say, Wonderful Days - NOT done by me, I hasten to add) that look fine on a PC too - so you *could* use the techniquest to get lots of movies on a CD. Be careful with that though...