Indeed, back in the early 90's the GM plant in my town (Janesville, WI) retooled the plant in order to build SUV's and light trucks almost exclusively, rather than a mix of trucks and cars. They even got the city and state to build a special access road--that caused several local businesses and homeowners to relocate--to haul materials to and vehicles from the plant.
While the plant made some E85 vehicles, the bulk of the vehicles they made were the gas guzzling Yukon, Suburban, Tahoe, etc. The plant is closing regardless of what they do with their stimulus money because they claim they cannot re-tool it to make fuel efficient cars--of course they don't mention the millions the state of Wisconsin paid either directly or through tax incentives to re-tool for the-then profitable SUV market.
Really don't know what a good solution for the industry as a whole to do--I don't want to see the automakers fail as I believe strongly in unions and such--but this idea seems a bit odd. I would think that existing manufacturers of railway engines and such would be able to re-tool for such a task for far less than the auto industry could switch over. I think it would be far more likely to switch over to the production of smaller vehicles with more fuel-efficient engines. We are a car culture, and I don't think that is going to dramatically change any time soon.